Best way to finance your first investment property

38 Replies

Much of the advice I read says the best way to start investing is to live in your first home so that you can go FHA, making it a little easier to get started (lower down payment).

My situation is unique in that my boyfriend just bought a house and I am living there with him, so purchasing and living in my own investment property full-time is not an option. As far as I can tell I have just a few options:

1. Go FHA and use that home as my current address, while essentially going back and forth between the two homes (risky, but I do work form home so this is doable). If I understand correctly, this will only be an option until we are married, since as a married couple we couldn't purchase a second home FHA due to the owner occupant rule. If we were married and I wanted to purchase a home myself with an FHA loan, would that be possible? Under the FHA guidelines, could I use a different address than my spouse's?

2. Wait and save for a conventional loan, but for me saving a 20% down payment on homes in my area will take possibly several years.

3. Save and get a conventional loan and purchase a property in an area where prices are much cheaper. The problem here is I will need to use a property manager, thus reducing my monthly profit.

I'm interested in the FHA route, but it seems tricky since I'm unmarried but not planning to live separate from my boyfriend full-time. Any thoughts or tips for how to pursue an initial investment property in this scenario?

go FHA. No one is going to check to make sure you are living there. You could have your physical address as there and mailing address where you actually live and no one will likely care.

@Jassem A. don't you have to receive mail at the address of your FHA-financed home?

I've never heard of that rule. Some banks will want to go paperless anyway. If you are that concerned you could have your mailing address be a PO box and your physical address be the FHA house and then have the mail to that house go to your PO box. Mail from your tenants could also go to your PO box as well so that they don't know where you live if that is a concern.

@Jassem A. as far as tenants, I think under FHA after a year of using that address you are allowed to rent, so I would go ahead and use my real address at that point. I'm only concerned about how it would work for the first year, while I was splitting time between my home and my boyfriend's.

Via this route I'd still be looking at over a year before I could rent my property out, but it's still probably sooner than I'd be able to come up with the down payment needed for a conventional loan. I wish I had an inheritance or some other large chunk of money coming to me, but as far as I know I don't!

I am sorry @Jassem A.  but your advice is totally incorrect.  @Kristy Good With a FHA loan you must sign a affidavit stating that you will occupy the home within 60 days of buying it and that it will be your primary residence for 1 year. FHA loan are government backed, so by not adhering to the affidavit you signed, you are committing federal mortgage fraud. They don't check / care? Yes, they do. They run random lexus nexus searches which will show where your mail goes, where your car is registered, who's name the utilities are in, ect. Google mortgage fraud penalty and decide if that is a risk you want to take.

You could wait a year if you want but I seriously doubt the lender will call the loan or do anything at all if you decide to immediately turn around and rent the property.  

How much would you be looking to spend versus rent the property for?

I'd be careful with using the full amount you are qualified for on a single house because then it will be difficult to buy any more properties.

@Brie Schmidt Thanks, that's what I thought. I'm not asking this because I'm attempting to break the law, in fact I'm asking it because I DON'T want to break any laws. If there's a way to make the FHA route work for me lawfully, I'd love to know. Otherwise I'm open to learning other good options.

In any case it would not be illegal for her to live in this property but always be over at her fiance's house and rent out a "room" to another family for a year and then change the lease to be for the whole house after a year.

She could put a bed and some of her stuff in the smallest room and lock it in case anyone ever decided to investigate. She could tell the tenant she lives there and it would not be a lie, she's just rarely there if ever.

@Jassem A.  I have no idea on the numbers yet, just doing some general research. It seems like decent homes in my target areas can be found for around $100k-$120k, but rent varies greatly in the different areas I'm interested in so I'd need to really narrow my research down once I was ready.

Originally posted by @Jassem A.:

In any case it would not be illegal for her to live in this property but always be over at her fiance's house and rent out a "room" to another family

That sounds like a lot of dodging I wouldn't want to be caught up in, even if it were legal. I just wanted some advice and maybe someone to clear up my confusion regarding my unique situation. Sounds like going FHA would be pretty tricky and messy.

It is a little messy but it's not a illegal to live somewhere and be somewhere else most of the time and also rent out rooms to cover your expenses for a year.

@Kristy Good  - It is not illegal to spend the majority of your time elsewhere, but the home should be considered your primary residence where mail goes and things are registered.  

Sorry for so many questions, and please excuse my lack of knowledge on the topic.

@Brie Schmidt I intend to purchase this property in my name only, so how would getting married (as we plan to do eventually) affect my options? As spouses, could we use two different addresses for our mail, vehicles, etc? And would being married affect our qualification for a second FHA loan since his current mortgage (with only him on it, but once married would be jointly owned, correct?) is an FHA loan?

Basically my concern is, should I be concerned with trying to make this purchase prior to getting married in order to utilize the FHA option?

@Kristy Good that advice from @Jassem A. is truly terrible. Using an FHA loan to buy a property then turning it immediately into a rental is mortgage fraud and there can be serious consequences. If you buy a house with an FHA OO loan, MOVE IN AND LIVE THERE!!!

An option is to buy a multi with an FHA loan and live in one of the units.

Otherwise, saving money to invest (that's why its called "investing") is really your best option.

@Kristy Good - You would want to do it before you are married then. I know you can get a second FHA mortgage if you add a dependent but the original FHA loan would need to be at a specific LTV, I believe 80%

@Kristy Good

Just curious why purchasing your own is out of the question.  Would it be possible for him to move in with you in 6 months?  He can then rent his house out.  Then move again in 6 months.  A form of house hacking.

As far as financing I would recommend putting away as a much money as possible right now. Talk to several small banks in the area and see what their financing criteria would be. Many have portfolio loans that do not require FHA rules. Purchase with 20-25% down

A third option is a hard money refi.  While many banks will not lend outright without 25% down or more, some will refi an existing mortgage as long as there is equity of 20-30%.  Find a bank willing to do this, locate a private or hard money source and purchase the house, then refi into a regular mortgage.

I have been purchasing rentals this way for the last 7 years.  I usually average 5-10k out of pocket on homes from 50k-150k.  I have done this in 4 different states.

@Jason Miller that's what I'm wondering - if we are married can I still purchase in my name alone? He is in the process of purchasing at this moment, so he has a full year ahead of him that he must live in his home (FHA financed as well).

Your ideas are great, I had not thought of your third option. Thanks for the tips!!

You can purchase in your name alone when you're married but if there is a divorce then it will vary by state and circumstance as far as what will happen.

Another affidavit you may encounter in the future that is even more retarded is when the city won't let you pull your own permits on an investment property unless you sign a statement saying you are going to live in the property.

@Kristy Good  

It all depends on your state.  I know Maryland can be a pain.  We live in CO.  I owned our first house before we were married.  Our current home is only in my wife's name.  We did that to allow us 20 properties as opposed to 10.  The bank was made fully aware of what we were doing and they had no issues.

My wife has to sign a document when we purchased our MO properties even though she is not on the loan or deed. CO, MN and WI had no restrictions.

I would have bought and moved into 4plexes every 6 months if I could have.  My wife did not want to move that much, so we found a nice fixer.  We use the equity for a heloc that allows for quite a bit of our real estate activity.  We have used it for down payments, fix and flip loans, and small business loans.

There are many options for you.  Paula Pant wrote a recent post on her blog (affordanything.com) about renting spare rooms.  She earned enough in 2 years to buy a house free and clear.

@Jassem A.  

You should get your "Genius" award revoked for your answers in this thread. 

That much risk for first investment property? I'd pass. 

FHA with a duplex where you live on one side and rent the other yes.

I'd find portfolio lenders in my area and build relationships from the get go. Cause that's what I'm currently trying to do. 

My 2c

My genius award was awarded because I suggested to someone that they move an arms dealer in the same duplex as their drug dealing tenant so that the community has a one-stop shop for drugs and guns.

In any case, I do know what I'm talking about and I'm sorry that you disagree with me.

I would like to rescind my comment that she not live in her FHA OO residence the first year in order to avoid the possible risk of prosecution for mortgage fraud.

@Jason Miller  such great information. Thank you so much!

We're not against investing together in the future, but I was wondering if we'd have more flexibility by me making my own initial purchase without him, as you mentioned you and your wife did. Seems like that may be the case.

@Kristy Good   I should mention that we were able to do this because my wife qualified for the loan on her own.  Some banks will require both people sign, shop around until you find one that will qualify you on your own.  Having both people sign the documents is an extra guarantee for the bank, so they will try to push you in that direction.

We bought a house well within our means which allows us to put away 30% of our income towards properties.  We are by no means in the high saver category.

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